The direction of the US dollar and its impact on stock prices has been an area of contentious debate over the years. On one side, you have the pro-dollar crowd, which says a strong dollar is good for the equity market as it shows confidence in the US economy and creates demand for assets denominated in dollars. On the other side of the argument, you have the anti-dollar crowd which argues that a weak dollar makes exports of US based multi-nationals more attractive on a global stage.
Looking at the recent interaction between the US dollar and equity prices, it would appear that the anti-dollar crowd seems to have the upper end of the argument. The chart below shows a comparison of the US Dollar Index and the S&P 500 over the last six months. As shown in the chart, as the US dollar was in a sideways range at the highs of its six-month range from November through January, US equities sold off hard. It wasn’t until early February when the dollar started to sell off that equities managed to rally.
While the rally in equities off the February lows has been accompanied by a falling dollar, taking a little bit of a longer-term view, the inverse relationship between the two isn’t nearly as clear-cut. Looking at the last two years, the dollar and stock prices have been more positively correlated. This chart from Friday’s Bespoke Report shows that from mid-2014 through early-2015, both the dollar and the S&P 500 rallied and were in steady uptrends. Then in early 2015, shortly after the dollar peaked and traded in a sideways range, the S&P 500’s rally ran out of steam. If the weaker dollar was, in fact, a positive for US equities, instead of a period of heightened volatility during which the S&P 500 is trading right where it was when the dollar index peaked more than a year ago, one would expect to see equity strength, which has certainly not been the case. While there are times where the opposite has been the case, in the vast majority of longer term periods, history has shown that a stronger dollar has been better for US equities than a weaker one.